International evidence on long-run money demand

Benati, Luca; Lucas Jr., Robert E.; Nicolini, Juan Pablo; Weber, Warren (2021). International evidence on long-run money demand. Journal of monetary economics, 117, pp. 43-63. Elsevier 10.1016/j.jmoneco.2020.07.003

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A dataset comprising 38 countries and relatively long sample periods, which extend in some cases to over a century, is used to study the behavior of long-run demand for M1. For a large majority of the countries, the evidence supports the existence of a stable long-run relationship between the ratio of M1 to GDP and a short-term interest rate. The log-log specification provides a good characterization of the data, with the exception of periods featuring very low interest rates. An extension of the theory that imposes limits on the amount households can borrow results in a truncated log-log specification, which is in line with what we observe in the data. We estimate the interest rate elasticity to be between 0.3 and 0.6.

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